When an individual with cryptocurrency holdings passes away without a will or instructions on accessing their digital assets, those holdings can be lost forever. Current estimates suggest that around 20% of all Bitcoin tokens are lost and non-recoverable. Therefore, it is crucial for crypto investors to plan the inheritance of their digital assets. In the U.S., cryptocurrencies are treated as digital assets or convertible virtual currencies, meaning the government considers them as property and not currency. This viewpoint has distinct tax implications and impacts the inheritance and ownership transfer process.
The use of crypto wallets is central to planning for a transfer of cryptocurrency holdings. Wallets, often provided by crypto custodians or digital asset exchanges, help secure digital assets and facilitate transactions. These are typically protected using a public key, an identifier for transactions to occur, and a private key, a secure password used by the wallet owner. These wallets can also be accessed via non-custodial methods using the private key or a seed phrase.
The U.S. government's classification of cryptocurrency as personal property can complicate estate planning and inheritance processes. It may also necessitate the naming of a beneficiary to inherit cryptocurrency investments. At the same time, these digital assets might be subject to different transfer taxes. For example, beneficiaries might need to calculate capital gains or losses if they use cryptocurrency tokens as a payment method or exchange them for fiat currency. Estate planning should also factor in someone who could safeguard the control of these tokens in a fiduciary or executor role.
In the event of a crypto investor's passing, recommendations for a smoother and complete transfer of cryptocurrency ownership include: making sure your loved ones are aware you have crypto holdings, recording seed phrases or backup methods, safely storing these backups, sharing with trusted people, and planning using secret sharing or multi-signature techniques for partial backups. As a cautionary note, mobile phones should not be used as a backup method as their lifespan or compatibility with wallet apps may not align with the time of transfer.
If lacking the relevant information to gain access to a wallet containing intended inheritable assets, beneficiaries may permanently lose control of such holdings. Therefore, including digital assets in wills, designating beneficiaries, clear communication about assets' location and access, and securing documentation for wallet addresses and private keys are suggested as measures for crypto estate planning. Additionally, appointing a fiduciary familiar with cryptocurrency can help manage any security and volatility issues regarding the assets.